Israel’s central bank left interest rates unchanged for the first time in over a year, halting an unprecedented cycle of monetary tightening but signaling it’s still on alert for the threat of faster inflation.
(Bloomberg) — Israel’s central bank left interest rates unchanged for the first time in over a year, halting an unprecedented cycle of monetary tightening but signaling it’s still on alert for the threat of faster inflation.
The decision to hold the benchmark at 4.75% was in line with the forecasts of most economists surveyed by Bloomberg. The monetary committee warned, however, that it’s possible rates may need to rise further yet.
“We are in an environment of great uncertainty, and there are several upside risks to inflation pressures,” Governor Amir Yaron told reporters after the decision. “It is certainly possible that we will need to increase the interest rate going forward, if we see evidence that the inflation environment is not moderating at a suitable pace.”
The shekel pared losses after the announcement, trading 0.2% weaker against the dollar as of 5:54 p.m. in Tel Aviv.
The pause follows a bigger-than-anticipated slowdown in annual inflation after 10 straight hikes brought official borrowing costs from near zero to their highest level since 2006. With price growth now below an annual 5%, Israeli real rates have turned positive for the first time in more than two years.
But the shekel has complicated the calculus for the central bank since Prime Minister Benjamin Netanyahu’s far-right coalition initiated plans to reduce the power of the courts, triggering mass protests from opponents who fear an erosion of the country’s democracy. Political uncertainty linked to the proposed overhaul already forced more tightening than the central bank first envisaged.
Following a breather when the plan was suspended in March, the currency has come under pressure again after Netanyahu’s government introduced legislation aimed at removing another judicial power — using “reasonableness” as a basis for court decisions. Legislators are looking to pass that law by the end of the month.
“In this decision,the Bank of Israel conveys to us that it wants to end the process of raising interest rates, but with a caveat,” said Guy Beit-or, chief economist at Psagot Investment House. “If the shekel continues to weaken, the local inflationary pressure will increase.”
Alongside the rate decision, the Bank of Israel’s research department also updated its outlook. Under a scenario in which the judicial controversy develops “in a way that does not affect economic activity,” the forecasters now see slower inflation than first anticipated and faster growth of gross domestic product this year.
In the event of an amicable resolution, inflation in the coming four quarters is expected to be 3%, reaching 2.4% in in 2024. GDP is expected to expand 3% this year and next.
The projection also showed the key rate averaging 4.75%–5% in the second quarter of 2024.
Although economic growth has cooled off, the labor market remains tight and inflation has been above the government’s 1% to 3% target range for over two years. Israel’s one-year currency swaps indicate investors see the base rate rising closer to 5% a year from now.
Yaron said the central bank is “determined to return inflation to its target and to ensure price stability in Israel.”
–With assistance from Harumi Ichikura and Gwen Ackerman.
(Updates with analyst comment in eighth paragraph.)
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